Tuesday 12 February 2013

Living Wages and Raising Rivals' Costs

In an impassioned plea against the unions' forthcoming 'living wages' campaign, Matt Nolan deplores that unions push for this kind of thing without considering the costs:
I mean I swear to god unions, and their determination to get what they want without thinking about the consequences for other people, makes me sick.  There are people who struggle, and as a society I think we should try to help them – part of this is ignoring faux research by unions, and making sure that we actually push government to sufficiently redistribute to the poorest among ask (with the acknowledged cost that this redistribution does lead to less income/production overall).
I'm not sure that they're failing to consider the consequences; raising rivals' costs is a pretty established technique for improving one's position. But that might not be everything that's here going on either.

The Herald reports* that the campaign will first target local councils. As John Gibson showed a couple of years ago, public sector workers already earn an 18-22% wage premium over the private sector, correcting for a big pile of worker and job characteristics. His paper didn't split Council workers from other public sector workers, so maybe Councils pay substantially less, but it hardly seems likely. They're not the first place you'd look to push if you were wanting to raise low-band wages. But they are likely the most sensitive to political pressure from union-based campaigns.

A few things to note:
  • If Councils push wages up for Council employees, non-Council companies will start winning more of the tenders for contracted-out services. If Councils then are likely to require that companies taking tenders implement living wages, we could view this as a Union strategy for raising rivals' costs. 
  • If the cost of Council services as a whole go up, the burden falls on ratepayers; Council service provision seems likely to be pretty inelastic to costs, and I'd expect especially so since Auckland city cartelisation.
  • Private business owners will rightly ignore the campaign, unless they think that warm glow enjoyed by customers would make the wage increase worthwhile. My bigger worry on this front is that some future government could formalise things by requiring living wages for all government contractors. 
  • In general, the burden of assisting the working poor is better born through things like Working For Families - the overall tax system - than by the firms employing low productivity workers and the people purchasing their products and services.
Chris Dillow very nicely made the case against living wage mandates last week: the costs of disemployment far outweigh the gains made by those remaining in employment. And recall as well that there is no particular reason that all wages need be sufficient for raising a family anyway: there are tons of jobs that are usefully done by high school students and other part time workers before they move on up to bigger things. Forcing those jobs to pay a lot more than they otherwise would will kill a lot of entry level positions.

As I suggested last year,
We can mandate that all wages are living wages, but we can't mandate that all the people who'd like to have work at that pay are able to find jobs.

* I'm not sure if they're reporting or campaigning here. A week-long series of articles timed to coincide with the Unions' policy launch? How much did the Herald charge the unions for the advertorial? The Herald advertises the forthcoming series:
The series
Today: Who earns below $18 to $20 and why
Tomorrow: Exploited migrants
Wednesday: Cleaning wars
Thursday: Living wage unveiled

Update: Partial retraction. The "Exploited migrants" story is rather good, much of it being about what you'd expect given how immigration policy runs (though they don't quite paint it that way). Restrict students on a visa to 20 hours work, and those willing to work more are then complicit with their employer in visa fraud. They can't really then do much without risking deportation. Require evidence of employment for a permanent resident's visa, and some will pay people to hire them.  


  1. I can't decide who is Her Majesty's Loyal Opposition... Campbell Live, the Herald or some wallies in Parliament....

    I doubt there is a dark deal between Unions and the Herald... but I see shared goals... the Herald needs readers so needs better 'news'... bit like the marketing/news tie up in real estate reporting...

  2. It's pretty bizarre targeting councils. They long ago divested themselves of the low wage occupational classes such as road workers. I'm not sure there are any councils left in the country that directly employ lower wage workers (notwithstanding the feeling of being undervalued many staff have). Not in significant numbers anyway.

    Where a council does still own a contracting arm such as CCC's City Care governance and administration are separated so that the council cannot pass a binding resolution requiring its subsidiary to manage its business in a particular way.

    If there is any cunning in this plan it may be in getting councils to pay higher rates to contract cleaners. It would barely affect rates but be an example to others and give councillors some warm fuzzies.

  3. That probably nails it, but what happens when the pollies pushing this idea get in power and get rid of "contracting out" of Council or Govt Dept services plus a requirement of employing young people.. suddenly a Council/Govt Dept requirement of paying a living wage of $19/hour comes back on the rate and taxpayers.


  4. Can they require that all contractors pay the living wage?

  5. Councils still have some lower paid staff, such as cleaners and gardeners, depending on their contracting arrangements. The issue with a raise (and a significant one at that!) is that it either has to be passed on to ratepayers or the service level has to be cut. I suspect it will be a cost passed on and as with these sorts of policy issues the benefits are concentrated and the costs widely dispersed which creates a lopsided lobbying effort.

    The benefit is obviously a happier workforce and an ability to get the best workers compared to competitors which places some pressure on other firms to knock up their wages too. As you mentioned this inevitably means that there are fewer jobs in total because of increased costs.